How to do Initial Public Offerings (IPOs)
Originally published: 14/12/2017 09:05
Publication number: ELQ-96636-1
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How to do Initial Public Offerings (IPOs)

A guide on how privately held companies transition into publicly held companies through IPO.


In this Initial Public Offerings (IPO) chapter we will cover six key topics:

> Initial Public Offerings Overview
> Involved Parties
> Listing Considerations
> Valuation Methodologies
> The “Greenshoe” Option
> Registration Statement

  • Step n°1 |

    Initial Public Offerings Overview

    An Initial Public Offering (IPO) is the means by which privately held companies transition into publicly traded companies. Hence the phrase, “taking a company public.” From an organizational standpoint, taking a company public is one of the biggest decisions a company’s board of directors will make in the company’s lifetime. The transition from a privately-held entity to a public one has a substantial impact on how the company operates.

    An IPO is also one of the most tedious projects an investment banker will work on for a couple of reasons. For one, it requires coordination across a large team of involved parties: the company’s management, the company’s legal counsel, the company’s auditors, underwriters, and the underwriters’ legal counsel will all have a view on issues that impact each participant. This group of stakeholders must reach a consensus on every decision for the process to smoothly progress through each step. Also, the IPO process is tedious because of the vested interest of board members, company management, and company employees. The company’s board and management are likely not acting only as a fiduciary to shareholders, but participating in the process as shareholders too. Thus the board and management have a responsibility to act upon the best interest of all shareholders, but in some situations, this may run contrary to what is best for the board member or management executive individually. This “agent-principal” problem can lead to a lot of possible complications in the IPO process.


    There are several reasons that companies might decide to undergo an IPO, including:
    1) Providing liquidity for a parent company or employees: Existing shareholders (generally employees, management, and board members, and often venture capital investors), use an IPO to monetize all or some of their equity stake. Without the IPO, it is often difficult to translate the “paper” value of the shareholders’ equity positions into cash, because it is difficult to sell the positions without a market for trading them.
    2) Access to the capital markets: Proceeds raised through an IPO are not solely for the benefit of selling shareholders. Proceeds can be used to fund organic growth and expansion, retire existing debt, or expand capacity in other capital markets. All other things being equal, public companies have more financing alternatives available, including bank debt, senior debt, hybrid/mezzanine capital, or equity-linked alternatives.
    3) Establishing a currency for growth: As stated, public companies have more funding alternatives available to manage operations and growth. One example of this is that publicly traded stock can relatively easily be used as a currency to fund acquisitions without using cash or incurring additional debt. The acquiring company simply exchanges its shares for the equity shares of the company being acquired. This not only fortifies the acquirer’s balance sheet, but also enables the target shareholders to participate in the anticipated upside of the combined company.
    4) Establishing a transparent value for the enterprise: Following a successful IPO, the company’s board and management team will have a readily available measure with which to determine the value of the company, as well as compare it with that of other companies. Additionally, the board and management can now measure value creation over a defined time period, and compare it to the value creation of peer companies.
    5) Branding/prestige: A public stock offering potentially strengthens visibility and name recognition for both current and new customers and stakeholders.


    From start to finish, the IPO process generally takes about four months. This typical time frame includes any organizational structuring, due-diligence processes, legal documentation, investor marketing and pricing, and evaluation of market conditions. There are a few reasons the process could take longer, however.

    Given that boards and management teams have a vested interest in maximizing proceeds, both for themselves as well as for the sake of all selling shareholders, market conditions can play a considerable role in determining timing. Directly following a market crash, for example, a company may decide it is not the best time to go public. As a result, in periods of significant market volatility, a substantial IPO backlog can develop. This was the case in the second half of 2008 and in 2009 following the financial crisis.

    Additionally, an IPO might get held up by regulatory review. For example, the SEC’s review of the company’s registration statement may result in a large number of comments and changes that need to be addressed before the registration will be approved. This can delay finalizing an effective registration statement and prospectus.

    The attached graphic displays the various elements of an IPO process, and the timing of those elements under normal conditions.

    How to do Initial Public Offerings (IPOs) image
  • Step n°2 |

    Involved Parties

    Every IPO has a series of parties involved in the process. Investment banks are responsible for underwriting and running the overall IPO process, but the process requires significant input from auditors, regulators, legal counsel, and public relations groups (not to mention the company management itself). Following is a brief summary of the role that each outside party will play in the IPO management process.


    The IPO syndicate group is comprised of investment banks that will serve as either bookrunners or co-managers. The bookrunners lead the IPO process. They perform the majority of the work required to take a company public, and are included in the process from the outset. Co-managers perform a subordinate role—they provide additional distribution of the shares being sold. The co-managers are often specifically selected to reward lending relationships (for example, if the co-manager lends money to the company), or for targeted sales of shares to investors within a specific geographic region.

    Bookrunners are referred to as such because they will manage the order book for the company’s securities once the IPO is placed into the market. Bookrunners are also responsible for the following:

    > Advising the client on timing of the IPO (from a market opportunity viewpoint)
    > Maintaining transparency around any current or future dividend policy
    > Organizing and executing the IPO roadshow (a kind of sales tour promoting the shares being sold) during the investor marketing period
    > Determining, justifying, and positioning the targeted valuation of the company (i.e., determining share price, and the implied valuation for the company based on that price)

    Typically, one bookrunner is named the “lead-left bookrunner” and acts as the lead coordinator in documentation, organization and coordination of the roadshow.

    While not acting as legal advisors, the bookrunners are intimately involved in legal drafting and negotiations throughout the process. Each bookrunner should be focused on confirming that the reported financials included in the prospectus agree with the information gathered in the due diligence process, and with the company’s projected financial model (if provided). Equally important, the investment banks are responsible for working with the company’s management to draft the best possible marketing story in the prospectus. 

    The details of the IPO story depend on a company’s industry, but the general structure includes:
    > Investment highlights
    > Industry overview
    > Company description
              > Business and product overview
              > Management’s discussion and analysis of operating results
              > Customer overview
    > Company strategy
              > Market share opportunities
              > Research and product development
              > Growth objectives
    > Dividend policy
    > Consolidated financial data and capitalization
    > Management biographies (particularly important in sponsor-led IPOs or high-profile, high-growth IPOs)


    In an IPO there are two sets of legal counsel involved: one represents the company, and the other represents the investment banks. These advisors are responsible for running legal due diligence, drafting the prospectus, advising on necessary disclosure policy and communicating with the necessary regulatory bodies. Generally, the work will be divided up such that if one set of counsel (say, the company’s legal team) is focused on due diligence or regulatory matters, the other counsel (say, that representing the investment bank consortium) might be responsible for writing the draft of the prospectus.

    The underwriters’ counsel acts as an aggregator of information for the bookrunners. It is responsible for collecting, consolidating and communicating the bookrunners’ comments to the company’s counsel on all legal documents related to the offering. The underwriters’ counsel must also provide the underwriters with clean legal opinions (i.e., a 10b-5 filing) and representations and warranties to protect the underwriters from potential frivolous lawsuits (particularly from investors in the stock if the value drops significantly after the IPO).


    The company’s auditor assists the company in putting financial controls in place, preparing audited and pro forma financial statements, completing accounting due diligence, and providing a comfort letter at the end of the process, confirming the accuracy of the financial information disclosed in the prospectus. The auditor’s role is extensive in aggregating and verifying financial information, but it is not involved in marketing the transaction.


    The company can choose to use an external investor relations team or utilize an internal team to interact with investors prior to and after the roadshow. More often than not, middle-market and large companies have an in-house investor relations group responsible for this important task both during the IPO process and afterward.

    How to do Initial Public Offerings (IPOs) image
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